Back in 1920s, a British Economist Arthur Pigou, introduced a concept to impose tax on any market transaction that has propensity to create a negative externality. The one, we came to call a Pigouvian Tax.
It is largely seen as a corrective tax brought in action to improve social welfare when the consumption of the concerned product bears a cost on lives and livelihoods of others by creating adverse side-effects for the society.
The aim of these taxes is to oppose and cover the market inefficiencies by the negative pressures, like environmental pollution, threatening the population around.
While these are intended for the producers of such sinful goods and services, economists argue that these taxes are rather borne by the users or consumers.
A few examples are tobacco taxes, sugar taxes or simply the very recent and celebrated carbon taxes.
This came in the wake of consistent greenhouse emissions across the world and progressive climate change impacts. With COP26 coming in closer, there is larger public debate for the need and ways to curb Carbon.
Advocacy for a Carbon Tax in India:
IPCC, UNFCCC, IEA, G20, OECD, BIMSTEC, GCC etc., all have rendered an urgent priority to adapt to or mitigate the impacts of climate change.
Ambitiously, India set forth emissions reduction targets to be achieved by 2030 and has recently set 2070 for net-zero emission target year.
India has even amended its Energy rules to mandate the inclusion of renewable energy share in power purchase and power usage.
When India is bound to control those poisonous fumes responsible for global warming but still ensure the aspect of development and growth throughout the country, it becomes very difficult for the country to balance the two.
Although there are various methods to decarbonize the Industrial sector: increasing the energy efficiency, developing new better manufacturing techniques, alternative lower-emission fuels adoption, carbon capture and storage, lesser absorption of resources etc.
But experts have frequently pointed out carbon pricing as the most cost-efficient and effective tool by incentivizing the greenhouse gas emissions reductions.
However, it’s a two-pronged tool: a cap-and-trade system.
It requires capping the total GHG (inclusive of Carbon) emissions. This helps to spur supply and demand in the carbon market while imposing carbon taxes on GHG emissions. Indirectly, it sets a price on Carbon, specifically the one present in fossil fuels.
Carbon trading involves capping the permissible levels of carbon to be emitted, creating the opportunity to offset in case of surplus production. On the basis of supply and demand needs, carbon becomes a commodity to be bought and sold.
Worldwide, nearly 13 percent of annual global greenhouse gas emissions are covered in the Carbon pricing schemes.
India has largely controlled its emissions based on the first mechanism, setting carbon prices in its trade markets but has failed on the second front: Carbon tax.
In the country, coal attracts a cess of Rs 400 per tonne. Similarly, petrol and diesel are highly taxed.
As per one of the studies published in ScienceDaily: “It has long been theorized that raising carbon prices would provide an incentive to reduce emissions through energy efficiency improvements. So, we looked to history to determine how cost increases have affected energy use efficiency in the past.”
It is often said that if the world wants to achieve its ambitious goals of 1.5 degrees C target under the Paris Agreement, it would have to look beyond just basic pricing mechanism.
While carbon taxes may help deliver greater abatement of emissions, the political leadership of the world have highlighted economic constraints as their doubts to pursue and implement the same.
Therefore, even though a few taxes may appear to be a form of carbon tax, the Indian taxation structure does not provide incentives to reduce emissions.
Based on the productivity model developed by Nobel Prize-winning economist Robert Solow: “Other studies have examined how taxing carbon emission would drive innovation in renewables.”
It was claimed that energy efficiency increases by 30% in case improvements in resource use is made.
“But we show that it would also lead to more-efficient consumption of energy — not just by getting people to use better existing technology, but also by motivating people to innovate better ways to use energy. This means that solving the climate problem, while still hard, is a little easier than previously believed.”
How does the carbon pricing or carbon tax work?
This is achieved by increasing the price of inputs involved with high-emission processes.
And undoubtedly, the businesses seeking to maximize enough profits are bound to react to this imbalance and will find alternatives or ways limiting the use of these high-rated inputs, thereby, decreasing the manufacture of products responsible for even the slightest of pollution.
While regulation of taxes barely covers a minimal part of emissions i.e. the sector being dealt with, Carbon taxes throughout the country, in contrast, will cover 100% of emissions made.
As per IMF, a supposed carbon price of US$25 per tonne of CO2 in 2030 will lead to reduction of carbon emissions by about 25% in India alone.
Win-win situation for the Government on levying the carbon tax:
Every carbon emitted can be a source of significant amount of tax for the regime.
If we consider the annual emissions of 2.0 billion metric tonnes CO2 per annum and Rs 1000/ tonne of carbon tax, the government can possibly raise a tax of Rs 200,000 crores annually.
However, it becomes difficult to balance the effective carbon pricing and associated growth.
Can respective tax work for all?
No country, can alone, fight the climate change or stop it unilaterally. Because no country alone is experiencing its impacts, what is seen in one region surely finds a mechanism to influence conditions in the other region.
In this light, European Union has formulated a new Carbon Border Tax, i.e., tax levied on imports of steel, cement, electricity, aluminum and fertilizer, if the carbon prices are not paid at the place of origin.
If a single country imposes carbon tax, it may just end up hurting its economy while a collective action can help fulfil the seemingly impossible targets.